Eco Investor December 2017

Pre-Profit Securities

More Changes at Vmoto

Vmoto is one of those companies that has a great idea and products - electric scooters - but is taking a long time to commercialize them and still seems a long way from getting some serious traction.

One big roadblock was out of its hands: for some time now some Chinese local governments have cracked down on electric scooters, which has dampened Chinese sales. This has now impacted Vmoto's Chinese joint venture, PowerEagle. In 2016 Vmoto acquired the Chinese company for which it had been making scooters as an original equipment manufacturer. The acquisition created a 51:49 joint venture, and this is now being undone. The exit from the Shanghai Jiye (PowerEagle) business is via the sale of Vmoto's 51 per cent interest to the joint venture partners.

Recently appointed chairman, Phillip Campbell, who now has the results of a strategic review, said that while the number of units sold to Chinese customers and distributors via Shanghai Jiye is significantly higher than for international unit sales, the margins on the Chinese sales are low in comparison to the higher margins from the units produced and sold internationally.

"This, coupled with the management time required to oversee the Shanghai Jiye operations, the impact of increasing Chinese Government regulation over the two-wheel EV industry in China, which is seeing our domestic Chinese unit sales numbers decline, and the capital that would be required to either refocus the Shanghai Jiye business on the export market or enable it to compete successfully in the changed and more regulated Chinese domestic market, has led the Board to form the view that it is in the best interests of Vmoto and its shareholders longer term to exit from Shanghai Jiye business."

The cash sale price is RMB2 million ($414,000). Vmoto will retain the ownership of the PowerEagle trademark as it is well recognized in China and it wants to maximize its value by either licensing its former joint venture partners or through a licensing agreement with a third party in the Chinese domestic market.

Vmoto said it will have no ongoing financial obligations to Shanghai Jiye. A one-off non-cash impairment charge is expected in the full year result, but Vmoto did not say what this would be, except that the cash from the sale will partially offset it.

Mr Campbell said "We strongly believe that exiting the Shanghai Jiye business now, via the sale of its shares, is in the best interests of Vmoto and its shareholders longer term given the business was not generating the returns expected."

Unfortunately he did not give further details on what the post exit Vmoto in China will look like and what its strategy will be in China.

But two future factors are clear. It is putting much more emphasis on non-China sales, and it is developing a relationship with electric motorbike maker, Super Soco.

An agreement between Vmoto and Super Soco, which Vmoto describes as an emerging electric vehicle company, will see Super Soco relocate to Vmoto's Nanjing manufacturing facility. This is to facilitate cooperation on manufacturing, supply chain management, product development and international sales and marketing.

Super Soco moving into Vmoto's factory will provide economies of scale for both companies. Super Soco will lease a significant part of Vmoto's manufacturing facility which at present is excess to requirements.

The international sales and marketing of the Super Soco products will be by Vmoto through the Vmoto distribution network. And Vmoto and Super Soco jointly participated in last month's EICMA international motorcycle exhibition, one of the world's largest for two-wheel vehicles, held in Milan.

Vmoto said the complementary nature of the product ranges will assist both companies to better penetrate international markets. Vmoto makes electric scooters while Super Soco makes an electric motorcycle. "Together, the Vmoto and Super Soco products address the full breadth of requirements in the international market and are strongly competitive across the spectrum vis-à-vis emerging market entrants from Eastern Europe and elsewhere," said Mr Campbell.

That sounds like a lot of cooperation, and there may be more coming. The companies said they are considering further collaborations to help fast track Vmoto's international strategy and "any further material collaborations will be announced as and when appropriate". Could a merge be on the agenda? It may not be out of the question.

Super Soco was founded in China in 2015 and has launched its first electric motorcycle, the Soco TS, with what is said to be very solid growth in its business in China and internationally in over 40 countries. It has significant equity from a number of large Chinese corporations and institutions, led by the Mi Group.

The Super Soco electric motorbike.

Mr Campbell said the strategic review endorsed Vmoto's focus on the B2B market and the company will continue to look for opportunities in delivery, fleet, rental and sharing markets. This may include third party financing to facilitate larger scale orders.

Overall, there has been a lot of movement for investors to absorb. It seems that Vmoto has come to believe that the governmental approach in China is not temporary, as it initially suggested, and is unlikely to improve in the short or medium term.

But the tie-up with Super Soco sounds like it has potential for Vmoto way above the additional revenue from renting out its unused factory floor space.

The focus will now turn more intently on Vmoto's non-China sales. In an early November update, Vmoto said it sold 19,457 units in the September quarter. This was down on the 23,045 units sold in the September 2016 quarter due to the situation in China. It was marginally up on the 19,258 units sold in the June 2017 quarter.

At 2,389 scooters, non-China sales are growing but are still only a small part of total sales. The number is up on September 2016 quarter non-China sales of 1,242, but down on the June 2017 quarter sales of 4,158, which Vmoto said was due to the European holiday season. It said a number of international opportunities are being progressed.

The problem with the refocus onto international sales is that Vmoto has been trying to win international sales for many years and while making progress it is slow work. So investors are used to being patient. They will need it. Even if sales speed up, there is a lot of ground to make up to offset China and get back to previous sales peaks.

At least Vmoto's long term share price decline has leveled off over the past year. (ASX: VMT)







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